The English Court was asked to construe inconsistent exclusive court jurisdiction and arbitration clauses in insurance policies and decide whether an ADR clause contained therein was binding. The Court reaffirmed the strong policy of English Courts in favour of arbitration and clarified the extent to which ADR clauses can be binding.
A dispute arose between Brazilian insurers (the "Insurers") and Brazilian insureds (the "Insureds") from the construction of hydro electric facilities in Brazil. The Insureds made a claim under insurance policies (the "Policies") for physical damage and consequential losses as a result of incidents that recently took place.
The Policies, which were governed by the laws of Brazil, were ambiguous in that they included both i) a court jurisdiction clause providing that any disputes "shall be subject to the exclusive jurisdiction of the courts in Brazil" and ii) an arbitration clause providing that a dispute "shall" be referred to arbitration in London. Further, the parties agreed in the Policies that prior to a reference to arbitration, they will "seek to have the Dispute resolved amicably by mediation." The Insurers denied liability and commenced arbitration proceedings against the Insureds seeking a declaration of non-liability.
The Insurers also applied before the English Commercial Court for the continuation of an anti-suit injunction which they obtained against the Insureds to restrain them from pursuing court proceedings commenced in Brazil.
The main issues the English court needed to decide in the application were:
- What was the proper law of the arbitration agreement?
- Was mediation a condition precedent to arbitration?
- How should the Court reconcile conflicting court jurisdiction and arbitration provisions?
Proper law of the arbitration agreement
Under English law (and most countries with a modern legal framework for arbitration) an arbitration clause is an agreement which is treated as distinct from the substantive agreement; this means that the arbitration clause may be governed by a different law to that of the substantive contract. The Insureds argued that the arbitration clause was governed by Brazilian law and only operative under that law at the behest of the Insureds themselves since, they said, it was part of a contract of adhesion upon which the Insurers were not entitled to rely (i.e. only the Insureds, not the Insurers, were entitled to commence arbitration proceedings if they so wished).
It was common ground that the Court had to ascertain, in the absence of an express or implied choice of law, the law with which the arbitration agreement had its closest and most real connection.
The Court, referring to previous case law, found that where there was no express choice of law for the arbitration agreement, the law with which that agreement had its closest and most real connection was more likely to be the law of the seat of arbitration than the law of the underlying contract. In this case, the Court held that the law with which the agreement to arbitrate had its closest and most real connection was the law of the seat, namely English law.
The consequence of the Court's finding that English law governed the arbitration agreement meant that no issue arose as to its validity.
The court then needed to determine whether mediation was a condition precedent to arbitration.
Was mediation a condition precedent to arbitration?
The Insureds contended that the right to arbitrate only arose if the requirements to mediate had been complied with, that those requirements were a condition precedent to the ability to refer the dispute to arbitration and that those requirements were not met here.
The Court found that whether or not a mediation clause constitutes a condition precedent to arbitration (i.e. the parties must comply with the mediation provisions failing which there is not valid referral to arbitration) will depend on the construction of the particular clause requiring the parties to mediate. The Court held that there are three requirements for a mediation agreement to be binding:
- The process has to be sufficiently certain, in that there should not be the need for any agreement at any stage before matters could proceed;
- The administrative processes for selecting a party (e.g. a mediator) to resolve the dispute and to pay that person has to be defined; and
- The process or, at least, a sufficient model of the process should be set out so that the detail of the process is sufficiently certain.
The Court found that the mediation provisions in the Policies did not comply with the above requirements and they did not therefore amount to an enforceable obligation to mediate prior to being able to refer the dispute to arbitration.
The court then considered the conflicting court jurisdiction and arbitration clauses.
Conflicting court jurisdiction and arbitration clauses
The Court treated the arbitration clause as being mandatory. When faced with an exclusive jurisdiction clause and an arbitration agreement, the Court found that the English Courts "look to the strong legal policy in favour of arbitration and the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered to be decided by the same tribunal."
It follows that, in that case, all disputes had to be referred to arbitration and very little was left in practice for the jurisdiction of the courts of Brazil under the exclusive jurisdiction clause in the Policies.
The Court decided to grant the application and continue the anti-suit injunction. This decision confirms three lessons of best practice:
- It is always a good idea to agree to locate the seat of the arbitration in an 'arbitration friendly' jurisdiction, such as England, to maximise the chances of the local courts upholding the validity of arbitration agreements and therefore the parties' decision to refer their disputes to arbitration;
- If the parties wish to include a mediation/ADR clause and the arbitration agreement is governed by English law, be aware that if the clause fulfils the three requirements listed above, it will constitute a condition precedent to arbitration; and
- Finally, avoid the uncertainty of satellite litigation that may result from inserting inconsistent court jurisdiction and arbitration clauses.